It’s a buyers’ market but the only active people are sellers
by Terry Ryder.
creator of hotspotting.com.au
It’s a buyers’ market but the only active people are sellers
There’s more property for sale across Australia than at any time in the past three years. Melbourne, which had relatively few homes for sales a year ago when the market was strong, now has record numbers of properties for sale – but few buyers.
This represents folly on the part of both buyers and sellers. Trying to sell into a flat market makes little sense and ignoring the opportunities this presents for buyers is equally illogical.
US billionaire Warren Buffett, probably the most successful investor the world has seen, says: “Profit from folly, rather than participate in it.”
There are myriad opportunities for investors to profit from the folly that currently dominates markets across Australia.
I say this with a sinking heart, because I know few people will listen. Investors will do what they did in 2009 – stay out of the market awaiting some mythical signal that the market has “bottomed” – thereby missing the best opportunities to buy at the lowest prices.
For a detailed analysis of markets nationwide, click on the topics below …
|National Overview||It’s not interest rates, it’s a crisis of confidence – but not everywhere.|
|Feature topic||The affordability debate has rejected reason and embraced hysteria.|
|Adelaide||Underpinned by a strong economy and affordable homes.|
|Brisbane||There’s a bright silver lining to Queensland’s storm clouds.|
|Canberra||Canberra retains its middle-of-the-pack rating.|
|Darwin||Things pointing down, but the next up may be sooner rather than later.|
|Hobart||Tassie still desperately searching for good news.|
|Melbourne||Melbourne an economic star but beware inner-city apartments.|
|Perth||Resources boom not driving general wealth – or Perth property.|
|Sydney||Change of government gives hopes for economy and property markets.|
|Conclusion||Real estate industry has shot itself in both feet.|
It’s not interest rates, it’s a crisis of confidence – but not everywhere
Media tends to blame interest rates for every scrap of adverse data from the Australian Bureau of Statistics. It’s the fallback position for writers who don’t understand their subject and lack imagination, but would like to appear knowledgeable.
When ABS figures released in early April showed a decline in housing finance approvals, economists rushed into print, attributing the fall to interest rates. In reality, it had little to do with interest rates.
It’s become fashionable for commentators and writers to say that the real estate market is flat, that there will be little capital growth this year and that it’s all because of interest rates.
As is so often the case, the research proves them wrong. The most recent surveys show that the level of interest rates is not the key issue in the minds of consumers.
The surveys confirm what the ABS statistics tell us. Consumers are not spending because their confidence levels are low. Consumers feel battered by a series of recent events:
- a federal election that has given us a government without a clear majority, resulting in a lack of decisive leadership
- a series of natural disasters, both within and outside Australia, which have left people feeling less than secure in the world
- big increases in petrol prices and family food costs that are straining family budgets
- the prospect of big increases in electricity and water bills, causing more stress
- concerns that the carbon tax will add further expense to their lives
- negativity in the media about real estate (as well as everything else).
Compared to those concerns, interest rates have faded into the background. The last RBA increase was almost six months ago, the current levels are not particularly high and the RBA governor has made it clear he doesn’t plan any more increases any time soon.
So the next time you read an “expert” telling you the property market is dead because of interest rate rises, turn the page.
Real estate is not dead. In many locations, sales activity has fallen and price rises have slowed down or stopped, but markets continue to do business. In specific locations, markets are alive and kicking goals.
The problem is generalisation. Anyone who speaks about “the Australian property market” clearly doesn’t understand the subject because there is no Australian property market. There are thousands of different markets across the nation and there are all moving in different directions and at different speeds.
Some are rising fast, some are rising slowly, some are marking time and some are falling. Last year Melbourne had a strong year, Sydney and Canberra had moderate years, Darwin’s long bull run came to a halt, Perth and Brisbane had minor declines in median prices and several of our regional markets experienced double-digit growth in prices.
Consider the latest figures on capital city prices from RP Data. Melbourne and Sydney had moderate rises in the 12 months to February, there was no change in Adelaide and Canberra, and there were declines averaging 4-5% in Darwin, Perth and Brisbane.
Outside the capital cities, there are strong real estate markets in regional centres such as Gladstone, Mackay, Newcastle, the Hunter Valley, Bendigo, Warrnambool, Karratha and Port Hedland.
But most commentators will tell you real estate across the country is flat, with a rise of just 1% in the past 12 months, because that is the average situation across the eight capital cities.
The affordability debate has rejected reason and embraced hysteria
The ratio between incomes and house prices hasn’t changed much in the past 10 years, according to Reserve Bank governor Glenn Stevens, nor is that ratio exceptional by global standards. Stevens says he is not particularly concerned about the level of our house prices.
These are the most significant words spoken about affordability any time in the last two years. But you can be forgiven if you don’t know that Stevens said these things, because Australian media failed to report it (with the exception of The Australian).
Media has reported every lunatic fringe outburst about Australia having the world’s most unaffordable houses and every crackpot prediction about our property values collapsing, but when the official most concerned with monitoring and controlling our markets issues a calm and rational assessment based on cold hard research, journalists are disinterested. How sad.
Stevens and his cohorts on the Reserve Bank board have shown they are more than willing to inflict interest rate pain if their information tells them inflation is getting out of control or the property market needs to moderate. But they see little reason to act at present.
Theirs is the only independent and expert view available to us, free of vested interests or political motives or a desire to achieve publicity by feeding something sensational to the media.
In that regard, they are unique amongst those participating to the affordability debate. All other contributions have come from people with ulterior motives.
People who claim our homes are unaffordable and our values unsustainable need to explain how that is compatible with the fact that Australia has the highest home ownership rates on planet Earth. Remember, the ratio between incomes and prices has not changed significantly in the past 10 years and prices across Australia rose only 3% on average last year, so it’s not valid to claim this is caused by recent price escalations.
One bogus report by a developer lobby group – the Demographia report that claimed we have the world’s most unaffordable housing – compared Australia with just six other nations and used inaccurate figures to suit their political purpose. It claimed that anything with a ratio between annual incomes and house prices above 3 is unaffordable. That means that if you earn $60,000 and you want to buy a home for $181,000 you can’t because it’s unaffordable. Or that people who earn $120,000 can’t afford to buy a $361,000 home.
That means 99% of the home sales in Australia could not take place. Yet they do, day after day. We have one of the most conservative lending environments in the world yet our ultra-cautious banks are willing to lend to people on properties with ratios of 4 or 5 – and our mortgage default rate is only 1.5%.
The Demographia report was a political rant from the lunatic fringe. Here’s an excerpt from the report: “Unless we are vigilant, high-density zealots will do their best to reverse centuries of gains and drive us back towards a Dickensian gloom.” Or this from the report: “The traditional way of life is being slowly crushed under the bureaucratic iron heel of high-density.”
Does this sound like a serious research document to anyone?
Yet its claim that we have the world’s most unaffordable housing was reported in every major newspaper and media outlet in Australia as fact. No questions asked.
Little wonder that so many Australians believe our housing values are unsustainable.
Others have jumped on the unaffordability bandwagon to attract attention, including economists who like to see themselves on the six o’clock news and the little people with big egos who have proposed a boycott by first-home buyers.
The issue is so emotion-charged and so appealing to shallow journalists that anything seeking a boost to their profile knows that an affordability report with a sensationally negative finding will always grab media attention.
Recently, I found on the Internet a global study by a reputable commercial real estate firm, Knight Frank, which has offices around the world. It looked at prestige property markets to determine who had the highest prices. Sydney, the most expensive Australian city, ranked 34th in the world.
Other truly global reports have found that Australia has not ranked in the top 10 worldwide for price rises in the past year or the past 20 years.
How many media outlets have reported these findings? None.
On the same day RBA governor Glenn Stevens made positive comments about housing affordability, an organisation seeking publicity published a report with negative findings about affordability.
Only one major media outlet reported Stevens’ comments. The report that claimed nurses and teachers can’t afford to buy anymore received massive airplay nationwide.
What’s missing in this issue is balance and reason.
Adelaide and South Australia:
Under-pinned by a strong state economy & affordable homes
I‘m a committed fan of South Australia as an emerging economy and a market worth considering by property investors. The state has a rapidly-growing resources sector, a solid agricultural industry, a nation-leading alternative energy sector and an internationally-significant defence business. All this underpins the real estate market, where homes generally are more affordable than in any other state/territory, except Tasmania.
SA’s economy is performing better in most areas than it was a decade ago. A CommSec survey of the states, which analysed key indicators against decade averages, says SA’s population growth – while slower than the other states – has shown the most improvement over the past decade. SA has experienced “historically high” annual growth levels.
SA farmers are expected to top the nation in the current financial year. A report by the Federal Government’s chief commodities forecaster shows that SA broad-acre farmers on average will earn their best income since 2004, driven by increased grain crops (a record $3.4 billion this year) and strong meat exports.
SA is the national leader in renewable energy, with 20% of the state’s energy coming from renewable sources. By 2020, SA expects to produce 33% of its energy needs from renewables, well ahead of the Federal Government’s target of 20% by 2020.
One of the things I like about SA is its ambition. It is proactively seeking to make itself a centre for education, the No.1 state for construction of defence equipment (such as the navy destroyers now being built) and a leader in water sustainability. SA hopes to pull in billions of dollars worth of water management contracts from the US. A 40-strong contingent of Australian business people, politicians and research experts attended water forums as part of the annual G’Day USA event in the US in January, marketing their innovation, research and science capability in urban and rural water management.
An added strand to the defence connection is the relocation of a major army battalion to Adelaide, which has resulted in defence buying 150 houses in the northern suburbs to house military personnel.
Meanwhile, BHP Billiton will start expanding Olympic Dam next year. This project, expected to cost at least $15 billion, has been years in planning and chief executive Marius Kloppers says he is “ready to move this project forward into execution”. BHP says Olympic Dam has a life of more than 100 years – double expectations of its operations in the Pilbara, Queensland or Canada. Olympic Dam has the world’s biggest uranium resource, along with its copper and gold deposits.
As one example of the impact of this project, the world’s biggest maker of construction and mining equipment, Caterpillar, is in negotiations with the State Government to invest in SA ahead of the Olympic Dam expansion. The talks are the strongest sign yet that the State Government expects BHP to give the go-ahead early next year to create the world’s largest open-cut mine.
While the developer lobby claims (dishonestly, I believe) that we have a serious shortage of new homes in Australia, no such problem exists in Adelaide. There have been numerous releases of new land for housing, mainly in the north, including a recent land release to allow developers to build 3,000 new homes.
Against this background, the locations I believe deserve special consideration by investors include Whyalla, Victor Harbor, Port Lincoln and Ceduna outside Adelaide, plus Seaford, the Elizabeth suburbs and the Tonsley precinct within the capital city.
Brisbane and Queensland:
There’s a bright silver lining to Queensland’s storm clouds
There were few positives to be seen in the early months of 2011 as floods and cyclones walloped Queensland communities, causing loss of life, destruction of property and economic loss. But longer term those natural disasters will contribute to a looming economic boom.
Home reconstruction and infrastructure repair will generate a high level of economic activity and jobs. They will work alongside the emerging resources boom and big spending on roads, rail links and hospitals to revitalise the Queensland economy.
Short-term, property values will take a hit in the locations affected by the storms, but the recovery will be swift. After the 1974 floods in South East Queensland, values declined an average 10% but within 12 months had returned to pre-flood levels. This time around, I expect the decline to be less than 1974 and the recovery stronger.
Qualified observers expect the earthquake-tsunami disaster to regenerate Japan’s economy and I predict a similar impact from the natural disasters in Queensland.
A plan for Queensland’s recovery from floods and cyclones was unveiled by the state’s reconstruction taskforce in March, with plans for “mission accomplished” by the end of 2013. An immediate cash injection of $220 million has been pledged for 18 Queensland councils to kick-start the reconstruction effort. Premier Anna Bligh outlined the timetable to rebuild Queensland, with reconstruction covering three phases. Phase 1, to end in June, involves transition from immediate post-disaster response to short-term recovery. Phase 2, from June this year to December 2012, will cover the methodical reconstruction and enhancement of all flood and cyclone-affected communities. Phase 3, from December 2012 to the end of 2013, will be a progressive handover of reconstruction responsibilities to agencies such as the State Government and local councils.
An analysis by Deutsche Bank chief economist Adam Boyton shows that, if the boost to coal prices is included in calculations, the economy may on some measures end the year larger than it would have without the floods. Boyton believes the potential impact of the floods on the Federal Budget has been exaggerated, with the total public sector cost of reconstruction unlikely to be much greater than $3 billion.
The biggest economic damage is likely to be recorded in the first three months of the year, reflecting the temporary suspension of coal shipments and the interruption to business in Brisbane. However, growth will recover strongly in the second half of the year, boosted by reconstruction efforts.
Workers will begin a mass migration around the state as Queensland’s key employment sectors bear the brunt of the flood recovery. While builders expect a boom for their skills in the state’s largest-ever rebuilding job, workers in the tourism and farm industries fear a downturn in demand. Armies of tradespeople are expected to descend on 20 or so flood-ravaged towns for the next three years.
Thousands of unemployed workers and out-of-trade apprentices will be offered cash assistance and jobs to help rebuild Queensland. A federal-state $83 million fund to help employers and workers includes a cash bonus of $3,350 to small businesses who take on an eligible apprentice to join the reconstruction effort. Apprentices will also be offered a relocation allowance to move to regional flood-affected areas.
Looking beyond the reconstruction effort, around 10,000 new jobs may be created in Central Queensland by about 50 Bowen Basin mining projects in planning, with a potential value of $20 billion. Rockhampton, Mackay and other regional centres are well-positioned to capitalize. Half the projects are well-advanced and include 12 new mines and 12 expansions of existing operations.
Queensland has another 15,000 construction jobs in the pipeline after a third big gas project in Gladstone was approved by the Federal Government. Origin Energy’s Australia Pacific LNG joint venture with ConocoPhillips needs only board approval before it will create 5,000 jobs during the next four years. The work will be on a $16 billion export facility with the potential to expand dramatically to a cost of $35 billion and generate as much as $150 billion in sales. Two other projects, led by Queensland Gas and Santos, are also in the early construction stages, each promising up to 5,000 jobs.
Santos says the cyclones and floods won’t slow down its major GLNG project. The project is a joint venture one with Petronas of Malaysia and Korean gas company Kogas, investing $16 billion to take coal seam gas from the inland town of Roma and pipe it to the port of Gladstone. There it will be turned into LNG, liquefied natural gas, at a rate of 8 million tonnes a year. The gas will be exported to Asia from Curtis Island. Spokesman Matthew Doman says the company is confident it can stick to its timetable.
The markets most likely to benefit from this investment are Gladstone, Toowoomba and Dalby.
Canberra and the ACT:
At the risk of repeating myself, Canberra retains its middle-of-the-pack rating
The ACT has the tightest job market in the country and almost half of vacancies go unfilled, according to the Department of Employment and Workplace Relations. Its latest skills shortage analysis found ACT employers reported just 1.2 suitable applicants for every job advertised last year. Only 54% of vacancies were filled in the ACT, whereas nationally, employers filled 61% of their vacancies.
Employment growth in the past 12 months was 3.3%, better than the national average of 2.8% and the second highest in the nation. The unemployment rate is 3.4%, the second lowest in Australia and well below the national average.
The employment situation in the ACT helps to explain why Canberra has one of the steadiest real estate markets in the nation.
Another reason is strong population growth. Canberra is in the midst of a baby boom, according to the ABS. While most states and territories experienced a boost to birth numbers in 2010, the ACT had the largest increase at 8.4%. Natural increase – the number of births minus the number of deaths – was the major component of the territory’s population growth at 58%, or 3,700 people. Figures also showed that the overall population growth rate for the ACT, 1.8%, was higher than the national average at 1.7%.
A third element is high incomes, with the ACT having the highest average incomes in the nation. Population growth, high incomes and low unemployment add up to a solid property market – which in turn feeds back into the Territory economy.
The ACT’s real estate market is being credited for a dramatic turnaround in the territory Government’s finances. Treasury’s mid-year Budget update sees an expected $83 million deficit in FY2011 revised down to less than $6 million. The ”peak deficit” in FY2012 is tipped to shrink from $135million to $60 million as stamp duty, land tax and Land Development Agency dividends continue to be the Government’s best earners.
The ACT is expected to continue experiencing strong housing activity in 2011 after recording a 75% increase in housing starts for the December quarter. Work began on about 1,700 new dwellings in the ACT during the last three months of 2010, whereas housing starts fell in all other states and territories. Approvals for new homes in the ACT rose 41% in the 12 months to January, easily the highest rise in the nation and well ahead of the national average of 13.3%. This included a 5.1% rise in January, also the best result among the states & territories.
Meanwhile, there have been two recent announcements of particular relevance to property investors. One is the search for Canberra’s new diplomatic precinct, with established consular suburbs bursting at the seams and emerging nations seeking to establish embassies. The National Capital Authority says at least 25 new embassies will be needed, in addition to the 96 nations that already have a consular presence. The authority says it is scoping out new sites to be designated as official diplomatic zones, but will not say which suburbs are being considered.
The other key announcement is that the ACT Government is accelerating the urban infill process in the city’s inner north. A Legislative Assembly committee recommended the end to a decade-long moratorium on development in the suburb of Turner. The Standing Committee on Planning and Public Works’ report on residential zoning in the inner north also says higher density residential development should be allowed – currently development is restricted to two storeys.
Chief Minister Jon Stanhope claims the community is behind the Government’s push for greater urban densification. He has released a report which says Canberra will resemble other capital cities by 2030. The Government report Time to Talk: 2030 outlines the Government’s intent to increase densification in urban areas and limit urban sprawl. ”Canberrans want infill to occur in carefully chosen locations, so that it occurs not for its own sake, but in order to improve access to services for residents, so that it broadens housing choice, rather than narrowing it, and so that it creates more affordable housing options for those who are not served well by the existing market,” Stanhope says.
Darwin and the Northern Territory:
Things pointing downwards but the next up may be sooner rather than later
Darwin’s real estate party is over – or has paused for a breather. Price growth has stopped and, let’s face it, it had to after so many years of big growth. I’ve been expecting it, and warning about it, but can’t claim to be have predicted it accurately because it took longer to get to this point that I expected.
I suspect that the pause will be temporary and market watchers should keep a close watch on Darwin. The big kicker for Darwin’s near future is the $12 billion Inpex gas project and this appears increasingly certain to go ahead. Company president Toshiaki Kitamura said in March an agreement to sell the gas would be signed within two months. And a global broking house predicted the project would be given approval and urged investors to buy shares – even if the price soared. Kitamura confirmed that Inpex would make a final investment decision towards the end of this year and gas production could begin in 2017.
The impact of a project of that size on a relatively small city would be immense.
In the short-term, however, the Territory’s stocks have fallen somewhat. Consider the following measures of the Territory economy:
- exports fell 17% in 2010, with big declines in the sale of gas and minerals;
- population growth has fallen from 2.2% in 2009 to 1.5% in the past year;
- economic growth in 2010 was the lowest of the states and territories;
- there has been a major drop in the amount of job advertisements according to the ANZ job advertisement index, with newspaper job ads dropping 5.4% in February, following a drop of 4.6% in January, 3.5% in December, 2.8% in November and 1.2% in October. This is despite a 1.2% rise in jobs ads around Australia in February.
- National home sales fell by an average 20% last year, to the lowest level in the past decade, according to property researcher RP Data. Darwin was the worst hit, with a slump of 30%; and
- Housing finance commitments fell 27% in the year to February, the worst result in the nation, while building approvals fell sharply in January.
On the positive side, there are some significant infrastructure projects in the pipeline, including a major new prison and a big facility for asylum-seekers. The detention camp being built on the outskirts of Darwin is expected to boost the Territory economy – hundreds of millions of dollars will be spent on maintaining and serving the 1500-bed camp at Wickham Point.
Beyond Darwin, the local economies in Alice Springs, Tennant Creek and Katherine remain quite vibrant. The Alice’s social problems, relating to alcohol-fueled violence, are also proving to be an economic asset because the influx of workers associated with government programs is creating strong real estate demand, leading to big increases in rents and prices in the past 12 months.
Tennant Creek is expecting a significant boost from a phosphate mine in its region, which will involve construction of a pipeline and rail link from the mine site to the town.
Hobart and Tasmania:
Tassie still desperately searching for good news
Tasmania continues to generate more pessimism than optimism. Its problems start at the top, with an unsteady Labor Government governing with the tenuous support of the Greens. David Bartlett recently became the third Tasmanian premier to quit mid-term in the past six years. Lara Giddings is the new Premier and she has warned of tough economic times and Budget cuts.
An economic report suggests the likelihood Tasmania will slip into a recession. Access Economics says the latest retail data shows Tasmania lagging behind every state or territory. Tasmania was the only state or territory to record negative retail growth figures in the 12 months to February and has recorded 14 consecutive monthly slumps in retail sales.
Tasmania has the slowest population growth and the worst employment numbers in the nation. Its building approval figures are also the worst among the states/territories. Not surprisingly, Hobart’s median house price has dropped 7% in the past 12 months.
The jobs of nearly one in 10 Tasmanian public servants are under threat after new Premier Lara Giddings announced $430 million in cuts to the state’s Budget. Three weeks after becoming Premier, Giddings warned that the cuts, over four years, were vital if the island was to avoid sliding back into the economic malaise of the 1990s. And she warned of more pain to come in the June Budget, describing the immediate cuts as merely “day one” of a new austerity drive.
The Retirement Benefits Fund, which manages superannuation for more than 75,000 state public servants, will axe nearly half its staff and send the work interstate. Fund CEO Philip Mussared has confirmed 85 jobs from a total 190 positions will be affected.
Hydro Tasmania will sack 50 staff over coming months, saying the redundancies are part of a “continuous improvement by refinement of its organisational structure”, which would lower operating costs.
Tasmania’s hopes for economic revival rest largely on the fate of the Gunns pulp mill which has been struggling for seven years to get the approvals it needs. In March, after deliberations by three federal ministers, court challenges and endless controversy, Gunns finally achieved a green light from Canberra. However, in keeping with the long-running saga, an 11th-hour hitch emerged that may yet stymie the $2.3 billion project. Hours after Federal Environment Minister Tony Burke declared the mill had cleared the final environmental hurdles, it emerged that the company was having difficulty meeting existing state permit conditions.
Gunns is offering new concessions to woo opponents of the pulp mill, including an independent panel of experts and locals to monitor its operations. The timber company says it will set up an independent reference group of Tamar Valley residents and mill experts to monitor the plant’s emissions and operations. As well, a 40% reduction of chlorine emissions and a guarantee not to feed the mill with native forest woodchips would be enshrined in amended federal permits. Gunns managing director Greg L’Estrange says the improvements — urged by green groups and mill opponents in private talks — are aimed at addressing local opposition to the project.
One positive event for the property market from the past few months was the announcement of a new suburb to be developed in Hobart by a Korean developer. MBKim Group plans to build a $500 million development with housing, offices, a language school and recreation facilities.
Melbourne and Victoria:
Victoria is an economic star but beware inner-city apartments
Victoria is the nation’s economic success story. We expect Western Australia and Queensland to lead the country in population growth and economic activity because of the impetus they get from resources activity. But Victoria has climbed to the top of national economic tree without any major resources contribution.
Victoria’s population growth rate continues to be above the national average, with its population rising 1.8% last year to reach 5.55 million. Employment grew 3.7% in the 12 months to January, the highest growth rate in the nation and well above the national average.
Growth in retail spending for the year ending January was 4.3%, the highest growth in the nation and well ahead of the national average of 2.4%. Retail turnover in October was $5.2 billion.
Victoria’s State Final Demand was $77.8 billion in the December Quarter, second only to NSW. SFD rose 4.4% in 2010, the second highest growth rate in the nation and well above the national average.
Housing finance commitments by owner-occupiers in the past 12 months represented the best result in the nation. Loans to investors in Victorian homes grew 16.5% over the year to January, the second highest growth in the nation and compared with a national average growth of 2.1%.
Residential approvals rose 24% in the past year, the best result in the nation. The number of residential approvals in January was easily the highest in the nation, well ahead of NSW and Queensland.
That’s a pretty good result from a non-resources state in a national economy driven by mining. Victoria’s strong economic performance helps to explain why Melbourne was the leading capital city for price growth last year.
It won’t repeat that performance this year but the long-term prospects for the state and its property markets remain strong.
There’s one key area where investors need to exercise care. There’s a looming over-supply in inner-city apartments which may threaten values and rental levels.
There are around 13,000 new apartments in the pipeline for the Melbourne CBD, Docklands and Southbank, with 2,300 already under construction. Developers will proceed with projects as long as they can sign up sufficient numbers of off-the-plan buyers and investors need to be wary. Melbourne has had over-supply issues in the recent past and faces a return to that scenario.
Perth and Western Australia:
Resources boom not driving general wealth – or Perth property
Western Australia is immersed in the greatest resources boom in its history. But many sectors of the state economy are struggling and Perth’s property market is not growing.
It’s the job of government to ensure that economic growth translates into prosperity in the wider community. If all that accrues from the WA resources boom is higher profits for BHP Billiton and Rio Tinto, the process will be failing the citizens of the state.
It’s odd that Perth home prices remain generally stagnant, given the impetus in the state economy. The market peaked in 2007 and there have been three down years since then. The market is overdue for recovery and the strength of the resources sector should be providing impetus. But we haven’t seen evidence of it to date (although key regional centres are growing strongly).
Many of the raw numbers suggest WA is going gangbusters. It has the lowest rate of unemployment in the nation, the highest overall economic growth and the highest population growth. The market value of WA’s 100 largest companies rose 14.7% during 2010, outperforming most other market indices, and finishing the year at $192.5 billion.
But key sectors of the state industry are struggling, notably manufacturing and retail. It’s the classic two-speed economy – anything related to resources is thriving and everything else is being left behind.
Australian iron ore exports, much of which come from WA, will climb another 12% next financial year, to a record $63.1 billion, the Australian Bureau of Agricultural and Resources Economics predicts.
BHP has announced a $13 billion expansion to its Australian coal and iron operations, as the latest in a series of mega announcements for the resources sector. Half of the spending will go toward rapidly expanding its iron ore operations in the Pilbara region, with mine, rail and port developments to support output growth to more than 220 million tonnes per annum.
Higher iron ore prices and increased royalties have helped deliver a $2.1 billion windfall to the State Government, which is now on track for a Budget surplus not seen since the last resources boom petered out in 2008. In March the Government reported an operating surplus of $1.1 billion for the first six months of FY2011, up from a $259 million operating deficit in the same period for FY2010. The figures have created hopes for a return to the boom-time surpluses leading up to the GFC, which peaked in FY2008 at $2.51 billion.
None of this wealth is doing much for the property market. Housing loan commitments for owner-occupiers in WA fell 22% in the past 12 months. Housing loans to investors fell 14%, compared with the national average rise of 2.1%.
Home approvals have shown a slight improvement, but the year-on-year growth of 3.2% is well below the national average growth of 13.3%.
Sydney and New South Wales:
Change of government gives hope for economy and property markets
From a political standpoint I don’t care who governs New South Wales, as long as they do a competent job. The former Labor administration was a long way short of competent and clearly most NSW voters thought so. The biggest election landslide in living memory gives NSW a chance to regain some of its lost status as a national leader and the Sydney market some prospect of catching up.
That all depends on whether Barry O’Farrell and his mates can deliver on their election promises. The most important ones relate to infrastructure, something Sydney and NSW needs in larges doses. If Adelaide, one-fifth the size of Sydney, has more infrastructure development happening than does Sydney, something is wrong.
But the cost of these big-ticket items, and the economic mismanagement of the previous government, will make the task difficult. There will no dramatic turnaround in the short-term.
Possibly the first sign of impact on property markets will be a rise in consumer confidence. This is the key factor impacting on real estate – not, as many journalists would have us believe, interest rates. Simply by virtue of the end of a government that was an embarrassment to many NSW residents, we should see a lift in spirits which will translate into greater spending and more real estate activity.
Ironically, the parlous situation in NSW has led to it getting a bonus $1 billion in GST revenue. This is because it has been a poor economic performer, with below average growth and low wages, and needs to be propped up by the other states. The state received a poor report card from the Commonwealth Grants Commission, the independent statutory body which each year distributes GST revenue. It finds that of the four big states, NSW has the weakest economic capacity and therefore needs a steady stream of GST revenue. How embarrassing for the state with Australia’s largest state economy and population.
Underneath that generalized situation there are locations going well, despite everything. The Hunter region, for example, is in the midst of a civil engineering boom with $2.6 billion worth of work under way and more than $13 billion in the planning stages. A shortage of trucks, operators and earthmoving equipment has brought interstate and Sydney-based firms flocking to the Hunter region in an effort to secure work, according to reports.
Hunter Valley Research Foundation principal research fellow Simon Deeming says the labour market in the resources and infrastructure sectors is “ridiculously tight” and says the boom was enhancing the region’s position as one of Australia’s leading engineering centres. Leading Australian construction analyst Cordell Information said there were a further 310 major civil projects in the pipeline for the region, with most of those planned for the Newcastle local government area. The boom is being led by mine expansion, major road and rail projects, and BHP-site remediation work.
It’s for reasons like these that the Hunter Region and Newcastle both feature prominently in a number of my Hotspotting reports. Most of the markets throughout this area are affordable and the growth prospects are strong.
Real estate industry has shot itself in both feet
The key factor constricting real estate activity is not interest rates. It is a crisis of confidence among the citizens of Australia.
In particular, consumers lack confidence in real estate because of negativity about the industry by the industry. The No.1 source of pessimistic news about real estate is the real estate industry itself, especially the developer lobby.
Lobby groups which represent builders and developers have been pushing a campaign of complaints against government for the past 2-3 years. There is daily distribution of press releases by the Housing Industry Association, the Master Builders Association, the Urban Taskforce and others, claiming we have a chronic shortage of housing, that land supply is restricted, that new homes cost too much because of government policies and that our housing prices are unsustainable.
The objective is to bully government into reducing taxes, eliminating stamp duty, axing infrastructure charges, releasing lots of cheap land and giving developers fast approvals without scrutiny.
At the core of this campaign is a fundamental lack of ethics. Development industry leaders know we don’t have a shortage of 120,000 houses. If we did, thousands of families would be sleeping in tents, there would be queues at open houses and display villages, vacancies would be zero in our biggest cities, rents would be rising 15-20% a year and average house prices would have increased 20% last year (they rose 3% on average across the country).
The bottom line is that the campaign has not succeeded in extracting major concessions from the federal or state governments. It’s only outcome is a stream of negativity about real estate which has helped to destroy public confidence in the market.
The industry has shot itself in both feet.